Sector Update

July 23, 2018

Some analysts and economists probably scratched their heads or at least looked at their bond charts twice this morning. Seemingly every financial and business publication included articles about the implications of and how to deal with a flat yield curve. Meanwhile, the Treasury curve steepened noticeably last week. And while modestly sized, the yield increases were progressive with maturities twenty years and beyond picking up 8bp or more. While curve slope remains shallow and last week’s small yield changes don’t disrupt the ongoing trend by much, last week serves as a reminder that markets will do what they do even if the narrative varies from outcomes.

Fairly consistent yield changes across investment-grade market sectors resulted in minor variations in spreads last week. The small variations occurring mostly resulted in tighter yield spreads between other sectors and US Treasuries. Most of the larger names in the corporate sector finished unchanged or slightly tighter, with a greater tendency toward narrower spreads for the longer maturities. Agency debt spreads remained mostly intact, with longer callable structures moving 1-2bp tighter and the balance of the sector moving nearly in lockstep with Treasuries. Tax-free municipal yield spreads to the Treasury curve tightened by as much as 7bp for some terms, though most of the sector more closely tracked Treasuries. Spreads tightened for much of the mortgage sector, with most terms and structures finishing 1-3bp closer to Treasuries.

The pace of activity continued to pick up last week, though volumes remained slow by historical standards. Bond switches and portfolio adjustments represented a larger fraction of customer inquiries, with the business quarter well underway and portfolio managers identifying portfolio changes resulting from market impacts and also from the passage of time.

Friday’s five-year Treasury closing yield of 2.77% exceeded the daily closing average so far this year by 11bp and exceeded by 43bp the average for the last year. The ten-year Treasury finished at 2.89% Friday, 6bp higher than the year-to-date average and 30bp above the average for the last year.





Adjustable Rate Mortgage Market Update

Because they trailed fixed rate MBS in terms of recent yield spread tightening, ARMs improved versus the balance of the mortgage sector in terms of relative value. This apples to the whole ARM sector, with 5/1 and 7/1 conventional offerings providing the most notable opportunities. 

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Agency Market Update

After steadily flattening over the last several weeks, the Treasury curve reversed course and steepened by several basis points, with Treasury yields rising across the curve.  Agency bullet yields moved in line with Treasuries.  On Friday the spread between 2- and 10-year Treasuries increased to 30 basis points after falling to as low as 25 basis points the week before.

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Fixed Rate Mortgage Market Update

MBS outperformed Treasuries in a meaningful way this past week, reflecting range-bound interest rates and a steady decline in implied volatility.  15-year MBS spreads to Treasuries tightened 3 to 4 ticks, while 30-year MBS spreads moved tighter by 2 to 3 ticks.  In fact, MBS spreads tightened in four of the past five trading days.

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Municipal Market Update

Prices on municipals were mixed daily for the week. On Monday the front-end strengthened, while the long-end weakened and intermediate maturities were steady. On Tuesday bonds maturing 10 years and in were steady, while bonds maturing on the long-end weakened. On Wednesday the front- and long-ends were steady, while intermediate maturities strengthened.

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SBA Market Update

Investor activities were focused on DCPC fixed rate bonds and USDA fixed rate agricultural loans, which are trading at attractive yield spreads.  SBA activity also continues to be focused on floating rate equipment pools offered at par and premium pricing as yields on SBA floating rate pools have moved higher over the last two weeks.

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CMO Market Update

Last we saw the usual interest in 4.5 coupons off of 4.5 collateral. Investors also considered relatively short GNMA CMOs backed by Jumbo collateral.  In previous commentaries, we mentioned increased interest in VADM (Very Accurately Defined Maturity) CMOs, and last week we saw increased activity in them.

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